Financial management of the European Union budget in 2014 Contents

1Errors and complexity in the use of EU funds

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from three UK government departments: HM Treasury, the Department for Communities and Local Government (DCLG), and the Department for Environment, Food and Rural Affairs (Defra). We also took evidence from the European Commission (the Commission) and the European Court of Auditors.1

2.In 2014 the EU budget received €143.9 billion (£116.0 billion) in contributions from 28 member states and other sources, and made €142.5 billion (£114.8 billion) in payments. The UK made a gross contribution to the EU budget of £11.4 billion, after taking into account the UK rebate of £4.9 billion. It received £5.6 billion in public- and private-sector receipts from the European Union (EU) budget, and hence made a net contribution of £5.7 billion (the third-largest net contribution of all member states).2 The EU financial year is based on the calendar year of 1 January to 31 December, whereas the UK financial year runs from 1 April to 31 March. In 2014–15 the UK net contribution to the EU budget was, excluding private sector receipts from the European Union, equivalent to 1.4% of UK Government total departmental expenditure.3

3.Of the £5.6 billion received by the UK in 2014, approximately £4.6 billion was in the form of public-sector receipts to UK government departments. These receipts primarily contributed to the EU’s policies of Sustainable growth: natural resources—including payments under the Common Agricultural Policy (CAP); and Smart and inclusive growth—supporting economic, social and territorial cohesion.4

4.The European Court of Auditors, the external auditor of the EU has given a true and fair view on the accounts of the European Union budget each year since 2007.5 Revenue has been legal and regular since 1999. However, for the last 21 years, the European Court of Auditors has issued an adverse opinion on the legality and regularity of payments, because estimated levels of error identified have been above the materiality threshold of 2%. In 2014, the estimated level of error was 4.4%.6 Although not an indicator of fraud, the estimated level of error represents money not used or administered in accordance with EU regulations and national rules.7 Our predecessors on the Committee of Public Accounts, as far back as 2005, identified the complexity of spending programmes as a factor contributing to errors. To protect the EU budget, errors can result in the Commission imposing penalties on member states in the form of financial corrections, including disallowance (applicable to CAP).8

5.In the last decade the UK has incurred at least £650 million in penalties from the Commission as a result of weaknesses in how EU funds have been spent in the UK. Between 2005 and June 2015, Defra incurred disallowance totalling £642 million in England.9 For the UK as a whole disallowances equated to £2.70 for every £100 of CAP funds received from the Commission in this period.10 Figure 1 shows that this was the sixth-highest figure among member states.

Figure 1: Disallowance as a proportion of EAGF and EAFRD funding received from the European Commission between 2005 and June 2015

Source: National Audit Office analysis of UK Co-ordinating Body information

Note: As a new member state, Croatia has not yet incurred any disallowance and so has not been included in this figure.

6. In 2014–15, DCLG reported an £8.1 million loss in its annual accounts due to ineligible payments and procurement relating to European Regional Development Fund (ERDF) expenditure. This loss relates to periods going back as far as 2000–2006.11

7.We asked when UK performance might improve to the level of, for example, Lithuania, which has paid one third of the disallowance incurred by the UK over the last decade.12 Defra told us that tackling disallowance is now one of its priorities.13 Since 2005–06, it had managed to reduce disallowance from 5% to 2%. Defra reported that it had reduced disallowance by investing in better control systems, appointing a compliance director at the Rural Payments Agency, and improving its land mapping system.14 However, it also told us that it had—only recently—established a joint strategy with HM Treasury to reduce disallowance.15 It now expects disallowance to increase in the short term as new CAP rules come into force—reaching up to 10% a year (£180 million).16 It told us that its target was for disallowance to be at or below 2% by 2020.17

8.DCLG told us that it has sought to learn lessons from past weaknesses. It has agreed with the Commission to bring management of ERDF under its direct leadership (rather than managed through regional organisations as prior to 2014), and has redesigned processes and created teams to promote and support compliance from the outset of new programmes. DCLG considers that more central control will reduce complexity, and scope for error.18 It believes that increased involvement will allow it to provide more support (for example, relating to procurement), which it is confident will in turn reduce errors. This new approach has been introduced for the current (2014–2020) spending period, some years after problems first emerged.19

9.The Commission acknowledged that its programmes can be complex, but UK departments sometimes add their own layer of complexity. Additional complexity has led to increased scope for errors.20 The disallowances incurred in relation to CAP were driven in large part by a Defra decision in 2005–06 to implement a very complex payments system, the most complex available. Defra told us that this decision has left a damaging legacy of disallowance.21 This includes, for example, disallowances in respect of land mapping of over €40 million in most years (49% of total disallowance in England since 2005).22 Similarly, between 2007 and 2013, the UK Government chose to manage the ERDF through regional organisations. This had added to the complexity and challenges of managing the programme, including, for example, restricting the ability of DCLG to influence and improve procurement practices.23

10.In contrast to the relatively weak performance of UK departments in managing some of the main EU programmes, UK private and public organisations have had a good success rate in securing funding from EU-wide funding competitions. Between 2007 and 2013, for example, the UK won more grants from the European Research Council than any other member state (761 compared with Germany’s 467) and received the second highest share of overall funding (€6.9 billion/£5.8 billion). HM Treasury also suggested that these winning bids were often significant in terms of delivering value for money. It was not clear from the witnesses what had been done to stimulate this success although HM Treasury noted that the Department for Business, Innovation and Skills had responsibility for the relationship with universities.24

2 C&AG’s Report, paras 2, 3.3

3 C&AG’s Report, paras 3.2, 3.5, Figure 16

4 C&AG’s Report, paras 2, 3.3, Figure 17

5 Q 24; C&AG’s Report, Figure 6, para 2.7

6 Q 24; C&AG’s Report, para 2.7

7 C&AG’s Report, paras 1.20, 2.9

8 C&AG’s Report, paras 1.17–1.18, 2.12, 3.22-3.23, Figures 22, 24–27

9 Q 25, 33; C&AG’s Report, Managing disallowance risk, Session 2015–16, HC 306, 13 July 2015, paras 1, 1.11

10 Qq 29, 81; C&AG’s Report, para 3.18, Figure 22

11 Qq 1, 33; C&AG’s Report, paras 3.19-3.20

13 Qq 1, 24; Department for Environment, Food & Rural Affairs (FME0003)

15 Qq 30–32; Department for Environment, Food & Rural Affairs (FME0003)

16 Qq 42, 57, 60–63; Committee of Public Accounts, The Common Agricultural Policy Delivery Programme, Twenty-sixth Report of Session 2015–16, 2 March 2016, paras 5, 17

22 C&AG’s Report, Managing disallowance risk, Session 2015–16, HC 306, 13 July 2015, Figure 6; para 2.6

24 Qq 76–78; C&AG’s Report, paras 3.8-3.9, Figure 19

© Parliamentary copyright 2015

Prepared 22 April 2016